When the current economic crisis passes, Brazil will enjoy a reputation as having been a calm port in the financial storm. International investors remain interested in opportunities for exposure to Brazil’s relatively resilient economy. Brazil-based businesses, in turn, continue to seek sources of international capital and participation in emerging opportunities in the international economy. Both groups routinely establish vehicles in the Cayman Islands, Bermuda and British Virgin Islands to facilitate the inflow and outflow of capital from Brazil, writes Alan Dickson from Conyers Dill & Pearman.
As leading international financial centres, each of these jurisdictions offers subtly different sophisticated financial products developed and demanded by internationally traded hedge funds, private equity funds, and structured finance firms. Each jurisdiction has highly developed electronic communications, banking and professional services to serve the needs of the international financial world. Leading Brazilian companies routinely find that the most optimal financial and insurance products involve one or more of these offshore jurisdictions.
Reasons for the success of the Cayman Islands, Bermuda and British Virgin Islands are well documented. Each offer flexible, straightforward legal and regulatory schemes together with a strong history of English common law. Each jurisdiction is a self-governing British territory enjoying a tradition of parliamentary government. Like many others in the international financial world, Brazilian companies who require a neutral jurisdiction within which to structure their affairs or financial products actively seek out such infrastructure.
Each of the three offshore jurisdictions competes and offers similar solutions in areas such as investment funds, ship and aircraft finance. But each jurisdiction has also carved out a special niche. The British Virgin Islands is a leading provider of special purpose vehicles for joint ventures or structured finance transactions. The Cayman Islands have developed as a centre of excellence for specialized investment funds and hedge funds. Bermuda offers a welcoming regulatory environment for insurance and for offerings conducted by public companies.
As an example of the innovation found in the offshore world, in addition to offering regular limited liability company formations, each of the jurisdictions also enable the creation of segregated portfolio/segregated account companies (SACs). These structures provide further flexibility in structuring financial products and corporate groups. Within a SAC, assets can be segregated by establishing separate accounts in order to provide a level of protection of the assets of one account from the liabilities in another. The ability to use a SAC is particularly useful in investment fund structures demanding multiple classes of shares, captive insurance products, or in a structure where the statutory segregation of assets is desired or needed.
It is common practice in Brazil for constitutional documents of investment vehicles and other financial structures to include customised terms. In each of the Cayman Islands, Bermuda and British Virgin Islands, shareholder agreements may be used to provide corporate governance for a privately-held offshore company. Negotiated terms may include share transfer restrictions, mandated board representations for shareholders, veto rights, tag-along rights, drag along rights, and an initial public offering (IPO) exit clause.
Often, groups investing into or from Brazil require tax neutrality in their international operations. This need, together with effective regulation and sophisticated infrastructure, are key drivers behind the trend for Brazilian companies to establish in an offshore jurisdiction. In particular, Brazilian businesses with operations in, or significant income arising from, more than one country are also attracted to the absence of withholding tax and require a jurisdiction that places no restrictions on the company’s ability to transfer funds in and out of the jurisdiction, or on paying dividends to non-resident shareholders. Again, each of the Cayman Islands, Bermuda and British Virgin Islands offer these advantages.
Recently, the offshore world generally has suffered criticism as developed onshore countries re-examine their individual regulatory systems and the global environment of financial regulation. Consequently, every offshore jurisdiction is on the defensive to justify their role in the international financial world. The Cayman Islands, Bermuda and the British Virgin Islands have responded productively to the international criticism by pursuing formal tax information exchange agreements with onshore jurisdictions. The willingness of these Islands to embrace international standards for exchange of information evidences their commitment to assuring transparency in all financial transactions involving these jurisdictions.
As one would expect, the trend for Brazilian business interests to utilise offshore structures has, in this environment, led to an increased interest in dealing only with those offshore jurisdictions accepted as part of the responsible international community. Given their sophisticated regulatory structure and common law backgrounds, each of the Cayman Islands, Bermuda and British Virgin Islands can be expected to conform to new standards in international best practices.
In the meantime, interplay will continue between lawyers in Brazil and in the offshore jurisdictions as a direct result of the growth and development of the Brazilian economy, and the ever increasing understanding within Brazil of the benefits and flexibility of offshore corporate vehicles.
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.